Real Money

'RealMoney' Radio Recap: Energy Rules

Cramer reveals the upside and downside of owning this sector.

Despite the stark selloff in energy stocks this week, don't lose focus on what propelled the stocks higher in the first place, said James Cramer Friday on his "RealMoney" radio show .

At the core of what has been driving the stocks is demand from China and to a lesser extent, India, he said. Those fundamentals haven't changed.

Don't become too focused on short-term inventory data, figures from Hurricanes Rita or Katrina, heating oil, the amount of gasoline pumped or our inability to conserve, said Cramer. Until demand from China and India is quelled and new reserves are found, the fundamental picture of demand and supply isn't going to change, he said.

Nevertheless, Cramer listed five negatives and five positives for owning energy stocks. The negatives, as he sees them, include:

1. Momentum funds: These funds buy energy stocks aggressively on the way up and dump them with abandon on the way down.

2. The declines in energy stocks have become brutal, taking away much of the fun in owning them.

3. The media and analyst community seem convinced energy prices are going lower.

4. Energy stocks could have "quicksand" underneath them as a result of going up so far, so fast.

5. Energy stocks are no longer under-owned.

The positives include:

1. No other companies have earnings revisions upward as big as what you can expect from energy stocks.

2. We're not discovering a lot of new energy reserves.

3. Terrorist attacks often cause energy prices to rise, and there will surely be more terrorist attacks.

4. Takeovers in the energy sector are likely to pick up again now that energy stock prices have fallen.

5. A big investment theme like energy usually isn't over in 18 months. Such themes usually last three or four years before running out of steam.